Chesapeake Energy Shale Operations Overview Pennsylvania Natural Gas Uses Residential and Commercial Cooking, washing, drying, warming water, heating and air conditioning Industrial Pulp and paper, metals, chemicals, stone, clay, glass, process foods, treat waste, incineration, drying, dehumidification, heating and cooling Power Generation Electric utilities and independent producers increasingly using natural gas to provide energy for power plants because: lower capital costs, built faster, work more efficiently, emit less pollution than fossil fuel plants. Transportation Compressed natural gas (CNG) for smaller to mid-size vehicles and fleets Liquefied natural gas (LNG) for mid-size to large vehicles and fleets 12 Million CNG Vehicles Worldwide: 2.7MM in Pakistan, 1.9MM in Iran and Argentina, Fuel cost is 50% less than gasoline 1.6MM in Brazil, only 112,000 in US and 30% less CO2 2 Chesapeake’s Key Operating Areas Transition toward greater development of unconventional oil and NGL resources in the U.S. 3 Characteristics of the Marcellus Shale • Deep geologic formation stretching over 95,000 square miles in parts of Ohio, West Virginia, Pennsylvania and New York • 4,000-8,500 feet below ground surface • Between 50 and 200 feet thick • Potential to be the largest natural gas field in the U.S., second largest in the world behind South Pars/North Field off-shore in the Persian Gulf shared by Qatar and Iran • Estimated to hold more than 500 trillion cubic feet of natural gas (estimated value >$1 trillion) • Low permeability • Requires combination of horizontal drilling and hydraulic fracturing 4 Chesapeake Energy Overview Founded in 1989 Headquartered in Oklahoma City, Oklahoma Offices regionally located in West Virginia (Charleston and Jane Lew) and in Pennsylvania (Mt. Morris, Canonsburg, Harrisburg and Towanda) Exclusive U.S. onshore focus Second-largest producer of U.S. natural gas and a Top 15 producer of U.S. liquids 3Q’11 natural gas production of ~2.8 Bcf/d 3Q’11 liquids production of ~94 mbbls/d 22 consecutive years of sequential production growth Nation’s most active explorer 1993-2012 ~ 11,500 producing wells 44,100 total producing natural gas and oil wells (includes legacy wells) 5 Chesapeake Energy Overview #1 driller in the world of horizontal wells Over the past 20 years: ~5,000 wells Nation’s most active horizontal driller 1993-2012 ~165 operated rigs nationwide ― 29 rigs currently drilling in Eastern Division » 17 in Marcellus North » 7 in Marcellus South » 5 in Utica ― 40+ rigs projected in Eastern Division in 2012 ― ~350 wells drilled in Eastern Division in 2011 ― ~380 wells projected in Eastern Division in 2012 Unparalleled inventory of U.S. onshore leasehold and 3-D seismic Higher production rates, less risk Exceptional drilling success rate – 98% 6 Marcellus and Utica Shale Overview Top leaseholder in U.S. shale plays #1 in Marcellus Shale: 1,780,000 net acres #1 Utica Shale: 1,360,000 net acres #1 Haynesville Shale: 460,000 net acres #2 Barnett Shale: 220,000 net acres Advantageous JV arrangements Marcellus: StatoilHydro (STO) Utica: Total (TOT) Barnett: Total (TOT) Haynesville: Plains Exploration and Production Company (PXP) Eagle Ford and Niobrara: Chinese National Offshore Oil Corporation (CNOOC) CHK the largest producer in the Marcellus 3Q’11 average production of 723 Mmcf/d Estimated Ultimate Recovery (EUR) per well of 5.75 Bcfe (Marcellus Shale) 7 Chesapeake’s Marcellus Production Growth Producing Wells 800 71 at year end 2009 183 at year end 2010 700 Producing 286 at year end 2011 Wells 600 Average Daily Production 500 Average 63 Mmcf/day in 2009 400 Daily 272 Mmcf/day in 2010 Production 695 Mmcf/day in 2011 300 (Mmcf/d) Cumulative Cumulative Production 200 Production 23 Bcf in 2009 per Year 119 Bcf in 2010 100 (Bcf) 371 Bcf in 2011 0 2009 2010 2011 8 Oil and Gas Regulation Myth: “..... the U.S. oil and gas production industry….. Has enjoyed loopholes in federal laws that allow it to pollute the land, air and water, and release toxic substances into the environment.” NRDC Press Release, October 31, 2007 Fact: Development of natural gas is regulated under a system of interrelated, interdependent, and overlapping federal, state and local laws that address exploration and operation. 9 What Applies to Oil and Gas Operations? Clean Water Act (CWA) Regulates surface discharges of water associated with drilling and production Storm water runoff from drilling and production sites Underground Injection Control (UIC) program of the Safe Drinking Water Act (SDWA) Regulates the underground injection of wastes from all industries including oil and gas Clean Air Act (CAA) Limits air emissions from engines, gas processing equipment and other sources associated with drilling and production Resource Conservation and Recovery Act (RCRA) Requires industry to handle and dispose of its waste or refuse according to specific guidelines National Environmental Policy Act (NEPA) Requires that exploration and production on federal lands be thoroughly analyzed for environmental impacts Occupational Safety and Health Act (OSHA) Protects the health and safety of oil and gas workers, as well as other industries State and local regulations must be as stringent, and often are more stringent, than federal rules and regulations. 10 Issues Regulated . Air Quality . Employee Safety . Groundwater Protection . Public Safety (Surface Casing Programs) . Erosion and Sediment Control . Noise . Waste Handling Disposal . Placement/Construction of Wellbores . Well Density/Spacing . Well Production . Well Testing . Surface Water Protection . Floodplains . Water Use . Fluid Handling/Disposal . Road Use . Incident Reporting . Spill Response & Remedial Measures . Wetlands . Chemical Handling & Transportation . Stream Crossings . Cultural Resources . Threatened and Endangered Species 11 Findings and Reports Among large counties (75,000 or more employees), Washington County, Pa. had the third highest percent increase (4.3%) in employment in the nation between March 2010 and March 2011 according to the U.S. Bureau of Labor Statistics. “Most of the job growth there is tied to Marcellus Shale gas drilling.” ― Scott Fergus, Washington County Director of Administration, 9/30/11 “We have not seen any impacts to groundwater as a result of hydraulic fracturing.” ― Robert Abbey, Director of U.S. Bureau of Land Management, 7/8/11 “The screening results found to date do not indicate a potential for major air related health issues associated with Marcellus Shale drilling activities.” ― PA DEP air quality studies in southwest and northeast PA, 11/1/10 12 The Production Process Four basic steps to production: 1. Site selection and well pad preparation 2. Drilling the well 3. Completing the well 4. Marketing the gas and reclaiming the site Plus: Best Management Practices (BMPs) Economic Impact of the Marcellus Shale 13 Safety Is a Top Priority Wells are drilled and constructed to recover the natural resources while protecting the environment and providing for the safety of workers and area residents SAFE: Stay Accident Free Everyday Employees attend two-day SAFE workshops SAFE program focuses on developing safe behaviors, promoting a safety-conscious culture and reducing risk in all operating areas Reward and recognize employees for contributing to safe working environments Protecting the community Establish road guidelines for Chesapeake traffic Use staging areas when necessary Dispatch roving patrol vehicle to monitor Chesapeake traffic Maintain and restore damaged roads Coordinate with school transportation departments Communicate with local emergency response personnel and provide weekly operational updates Inform and update local officials on status of operations and residents’ concerns Work with operations personnel to report issues to 911 office, including non-emergency situations 14 Step 1 Site selection and well pad preparation 15 Site Selection A number of factors are considered in selecting a drilling site: Leasehold Favorable geology Topography Access Roads Routes for pipelines and utilities Environmental factors such as wetlands and sensitive wildlife habitat Available water source(s) 16 Well Pad Preparation Well pads can be located in rural or urban areas Pad preparation requires approximately 4-6 weeks Typical horizontal well pad requires ~5 acres to construct (not including fresh water impoundments and access roads) 17 Step 2 Drilling the well using horizontal drilling 18 Advanced Drilling Technologies Reduce Surface Footprint Vertical drilling patterns required: Up to 32 well pads needed to recover the natural resources from 1280 acres (an average unit size) Multiple roads with pipelines and utilities required to access the wells Total surface disturbance was ~45 acres 19 Extraordinary Technology Advances Extract Natural Gas More Effectively Horizontal drilling substantially reduces surface footprint 6-8 horizontal wells anticipated drilled from each 5 acre pad Each independent well is individually permitted and regulated by the state’s DEP Only one road with pipeline and utilities to well pad Approximately 85% less surface disturbance compared to vertical wells 20 Drilling the Well Using Today’s New Technology Drilling is a 24/7 operation Reduces rig time on location Drilling typically lasts 3-4 weeks per wellbore “Closed-loop” drilling system All drilling materials are contained No materials collected in earthen pits 21 Drilling the Well-Groundwater Protection 4 or more layers of protection are installed in the well to isolate the well from